The Inside Story of How PayPal Ousted an Early Rival

Ilan Mochari's debut novel, Zinsky the Obscure (Fomite Press, 2013), earned rave reviews from Publishers Weekly, Kirkus Reviews, and Booklist. Boston's NPR station named it one of 10 "Good Reads for the Summer." He is a senior writer for Inc. magazine.

Why is networking important for organizations? The first answer is the obvious one: Your employees (and everyone they're networked to) can help you learn crucial outside information--even secret information.

For example, let's say your leadership team knows someone who works for your competitors. That someone is probably going to be cautious around you. By contrast, the rest of the organization--the non leaders--are in a better position to clandestinely learn secrets through their networks.

In The Alliance: Managing Talent in the Networked Age, LinkedIn cofounder Reid Hoffman and his coauthors, Ben Casnocha and Chris Yeh, tell a tale of how the power of organizational networking helped PayPal defeat a key early rival. This story is excerpted from the book:

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In the early days of PayPal, its most important rival was Billpoint, a rival payment system that was a joint venture between eBay--PayPal's most important partner--and Wells Fargo Bank. Consider the situation PayPal faced: the vast majority of its business at the time consisted of handling payments for eBay auctions, yet eBay itself owned a competitive payments business (Billpoint) that it was promoting to every single eBay user. To outside observers, the circumstances must have looked grim.

Yet as we know, PayPal triumphed over Billpoint, leading eBay to purchase PayPal for over $1.5 billion. One of the key factors was PayPal's superior use of network intelligence. Reid led this intelligence-gathering effort for PayPal (he was executive vice president at the time) and asked all the members of the team, from executives to individual engineers, to use their network intelligence to learn about Billpoint's strategy. Billpoint's team, on the other hand, completely ignored the potential for network intelligence to provide insights into PayPal's strategy.

From conversations with other companies that were building on the eBay platform such as Honesty.com and AuctionWatch (now Vendio), PayPal employees learned two key facts. First, the Billpoint team was convinced that the key success factor for an internet payments system was a deep banking relationship to combat fraud. Billpoint's leadership felt that the Wells Fargo relationship represented an overwhelming advantage over PayPal.

Second, contrary to Billpoint's belief, the companies on the eBay platform (and their customers) didn't consider a deep banking relationship that relevant. They placed a far greater value on ease of use, especially in e-mail communications. Fraud prevention was a hygiene factor, not a driving force. None of this information was public, but none of it was secret either.

Network intelligence should be tapped ethically; PayPal employees didn't skulk about in costumes, send questions from fake e-mail accounts, or root through Billpoint's garbage bins. They simply confirmed their findings by talking with Billpoint managers and employees and asking them how they viewed the market.

Even more amazing? During these direct conversations, the Billpoint people never bothered to ask the same questions of PayPal's people. PayPal's strategy explicitly emphasized network intelligence; Billpoint's did not.

[Another] function of network intelligence is to generate serendipity, which is a major driver of innovation. Writer Frans Johansson has argued that innovation arises at the intersection of different dis- ciplines and cultures. Most innovation is not sui generis; rather, it consists of the application of existing technology or practices to a new field (such as applying medical IV bag technology to basketball shoes).

When employees tap their professional and personal networks, they tend to collect feedback from friends with a wide variety of backgrounds, experiences, and areas of expertise. As Deborah Ancona, Henrik Bresman, and David Caldwell of MIT noted in their paper, "The X-Factor," "When innovation, adaptation, and execution are critical, success is closely related to how the team interacts with outsiders" because successful teams "reach across boundaries to forge dense networks of connection, both inside and outside the organization."

If you're in a broom closet, it's no great accomplishment to be the smartest person in the room. Network intelligence expands "the room" you're in to stadium-sized dimensions, encompassing the vast and diverse global networks of all your employees. This will help you solve problems faster. Better yet, it will strengthen the overall employment alliance. Employees want to be networking, and network intelligence programs and policies help them do just that.

[One more] function of network intelligence is to help you see opportunities you would otherwise miss. One of the hidden stories behind PayPal's success is the crucial role network intelligence played in discovering the formula for viral growth. Once the team realized that eBay was a major driver of PayPal usage, its members looked to other companies in the eBay ecosystem for inspiration.

One of these companies, Honesty.com, had discovered a way to leverage eBay's active sellers to grow. Honesty.com provided an auction counter; if a seller shared his eBay credential with Honesty.com, Honesty.com could add its counter to every single one of the seller's auctions. This system exposed all of a seller's auction bidders to the auction counter product, prompting other sellers to sign up and begin exposing their buyers to Honesty.com, and so on.

This insight didn't come from Reid or any of the other senior executives; the Honesty.com discovery came from "ordinary" front line employees. Once PayPal implemented its "Pay with PayPal" feature, sellers began adding "Pay with PayPal" to all their auctions, and PayPal's growth took off.

Without network intelligence, the PayPal success story might have ended quite differently.

Reprinted by permission of Harvard Business Review Press. Excerpted from The Alliance: Managing Talent in the Networked Age. Copyright 2014 Reid Hoffman, Ben Casnocha, and Chris Yeh. All rights reserved.